A single judge bench of the Karnataka High Court passed a detailed judgment on 2nd June, 2021 striking down Rule 31A (3) of the Central Goods and Services Tax (CGST) Rules, 2017 and Rule 31A of Karnataka Goods and Services Tax (KGST) Rules, 2017.
The judgment was pronounced by Justice M. Nagaprassana based on writ petitions filed by the Bangalore Turf Club Limited and Mysore Race Club Limited challenging the validity of Rule 31A of the CGST and KGST Rules that deemed the value of supply of actionable claim in the form of chance to win in betting to be 100per cent of the face value of bet or the amount paid into totalisator.
Analysis by the court and judgment
The court noted that the components of tax are a taxable event, taxable person, rate of tax and measure of tax. It further analysed the definitions of supply, services, actionable claim and valuation of services.
In the context of the activity of providing totalizator services provided by the Bangalore and Mysore Turf Clubs, the Bench noted that the club is not engaged in the activity of gambling or betting themselves but is merely facilitating betting among punters.
It noted that a totalisator is different from regular betting and the club merely holds the pooled amount staked by punters in trust and distributes back the winnings in proportion of the money staked while only retaining the club’s commission.
Noting the definitions of valuation, supply, consideration etc. under the parent legislation, i.e. the Central Goods and Services Tax Act, 2017, the court stated that the only consideration earned by the race club is the commission for facilitating the totalisator and pooling of bets of punters and members.
The court also drew parallels between totalisator and the business of a travel agent or stockbroker and said that all these businesses only earn commission for their services, which is the only consideration they receive.
Further, relying on the 1996 judgment of the Supreme Court in Dr. KR Lakhsmanan v. State of Tamil Nadu & Another, Justice Nagaprassana in his judgment noted that it is undeniable that horse-racing and the activity of betting through totalisator was a game of skill and does not fall within the ambit of gambling.
Further, the court also distinguished the recent 3-judge bench judgment of the Supreme Court in Skill Lotto Solutions Pvt. Ltd. v. Union of India & Ors upholding payment of GST on face value of lottery tickets.
The High Court noted that the issue in Skill Lotto was not of challenge of Rule 31A but whether lottery, gambling and betting can be excluded from the general exemption from taxability granted to actionable claims. It further said that in case of lottery, the face value of ticket is well known and printed in the gazette, while in case of betting on races through totalisator, there is no face value of the bet that can be known or ascertained in advance.
Based on analysis of all these factors and previous judgments of the Supreme Court, Justice Nagaprassana struck down Rule 31A(3) of the CGST and KGST Rules as being ultra vires of the parent GST law.
It further held that the Bangalore and Mysore Turf Clubs need to pay GST only on the commission it earns from the totalisator and not on the entire bet value.
Implications of the judgment
The decision of the Karnataka High Court will be a huge boost to the horse racing industry as well as other online skill-based gaming websites like poker, rummy, fantasy sports etc. who are also facing claims by the GST department and litigation in courts to pay tax on the entire entry fees or pooled amount, rather than commission or platform fee retained by them.
Online gaming platforms can, by virtue of this order, also argue that they merely provide service of facilitating skill-based online games and hold the pooled money/entry fees in trust that is to be distributed to players. They will get good grounds to contend that the only consideration that they receive is the commission they retain, which is the value of supply.
The recently formed Group of Ministers (GoM) by the GST Council to study valuation and taxability of horse-racing, casinos and online gaming will also have to take into consideration the judgment of the Karnataka High Court and may adopt its reasoning while making recommendations to amend the existing provisions and tax only commission or fees retained by race clubs, online gaming platforms and casinos.
Technically speaking however, this decision is applicable only in the state of Karnataka and does not apply in other states, and merely has persuasive value in other High Courts. Further, the decision is likely to be challenged before a division bench of the Karnataka High Court and might later go in appeal to the Supreme Court as well. Thus, more litigation on this subject is expected in the coming days.